RingCentral Inc (RNG) 2017 Q4 法說會逐字稿

Greetings, and welcome to the RingCentral Fourth Quarter and Full Year 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Paul Thomas.

Thank you.

You may begin.

Thank you.

Good afternoon, and welcome to RingCentral's Fourth Quarter and Full Year 2017 Earnings Conference Call.

I am Paul Thomas, RingCentral's Senior Director of Investor Relations.

Joining me today are Vlad Shmunis, Founder, Chairman and CEO; David Sipes, Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Dave and Mitesh, followed by Q&A.

Some of our discussions and responses to your questions will contain forward-looking statements.

These statements are subject to risks and uncertainties.

Actual results may differ materially from our forward-looking statements.

A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion.

RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call.

I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, comparisons of historical results under 605 and 606 accounting standards, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral.

For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to corresponding GAAP measure is not available as discussed in detail on the slide deck posted on our Investor Relations website.

With that, let me turn the call over to Vlad.

Good afternoon, and thank you for joining our fourth quarter and full year earnings conference call.

Our fourth quarter was an outstanding finish to a great year for RingCentral.

We extended our lead in the market.

Businesses are increasingly taking advantage of our industry-leading cloud communications and collaboration solutions.

Let me begin by covering some of the key highlights for the last quarter and the year.

First, total revenues for the fourth quarter grew to $141 million.

This is a 34% year-over-year increase and is above the high end of our guidance range.

Total revenues for the full year 2017 were $502 million, and 32% year-over-year growth.

Crossing the $0.5 billion revenue mark is a significant milestone for a software-as-a-services company.

Second, the growth in our core subscription business, excluding the impact of AT&T, continued to excel.

In Q4, our core subscription revenue of about $115 million grew 36% year-over-year, up from 28% in Q4 of last year.

Third, our mid-market and enterprise business continue to lead the way.

We define mid-market and enterprise as 50 seats or greater.

This is now $178 million annualized business.

It grew 76% year-over-year, and contributed over 55% to our new Office business in the quarter, up from 50% in the previous quarter.

Fourth, this quarter, we closed a record 15 deals with over $1 million in total contract value.

This is up from 10 deals in the previous quarter and 5 deals a year ago.

These wins highlight the significant progress we have made last year with enterprise customers.

Fifth, as the market transitions from on-premise solutions to the cloud, channel partners are increasingly gravitating toward cloud providers.

We're benefiting from the shift.

Our channel partners capped off the year by delivering another stellar quarter of growth.

For the seventh quarter in a row, our channel partner bookings grew by over 100% year-over-year.

Channel partners contributed over 35% of our overall bookings in the quarter.

This is up from about 20% last year and 30% last quarter.

Finally, I want to provide you with an update on our AT&T business.

In January of this year, we acquired all RingCentral Office@Hand by AT&T accounts.

The transitioning of these customers to RingCentral Office has commenced and is expected to be completed over the next 12 months.

It is clear that cloud is winning and RingCentral is winning in the cloud.

The shift to the cloud is ubiquitous.

Cloud players are gaining share from legacy with a few -- fewer cloud providers vying for the $50 billion-plus market disruption opportunity.

We continue to significantly outpace in the cloud.

Last year, we grew twice as fast as the #2 company in this space on a business that is almost twice as large.

And we win across all segments.

Casting our mid-market and enterprise business as customers with over $1,000 MRR, in Q4, ours was a $219 million business, growing at over 60% year-over-year.

This is twice their growth rate, and it is on a meaningfully larger base.

The reason we're winning is because of our relentless focus and commitment to innovation.

Our investments in innovation over the last several years has created a well-differentiated platform.

To recap, we offer: one, leading collaborative communications suite offering unified experience of comprehensive cloud PBX and fully featured team messaging.

Two, industry-leading open platform with a rich app gallery.

In fact, I encourage you to go to apps.ringcentral.com and see for yourself.

We now have over 1,000 standard and custom applications integrated with our open platform.

And we have a fast-growing community of over 10,000 developers building efficient enterprise workflows using our platform.

Three, best-in-class user experience with integrated contact center, web meeting and video conferencing.

And fourth, world-class delivery capabilities offering native experience in 37 countries for global multinational enterprises.

In summary, it was a great finish to an outstanding year.

We are now a $0.5 billion recurring revenue company with industry-leading growth.

We continue to extend our lead in the market with excellent traction in all segments and especially in mid-market and enterprise.

We believe we are well positioned for success.

We look forward to an exciting year ahead and to crossing the $1 billion mark in 2020.

Now for some color, I will pass it over to our Chief Operating Officer, Dave Sipes.

Thank you, Vlad, for highlighting the success we had in the quarter and the year.

The momentum we are seeing spans across all segments, especially in the mid-market and enterprise.

This is the result of our commitment to innovation and customer success.

To that end, in Q4, we completed our previously stated goal of establishing local enterprise sales force presence in major cities across the U.S., Canada and the U.K. But this is just the start of our enterprise expansion.

The 15 million-dollar-plus TCV deals that Vlad mentioned demonstrates the success we are experiencing in this segment.

We will continue to aggressively grow our enterprise direct sales presence to capture the large cloud opportunity at hand and to further cement our market leadership.

We are winning with our integrated communication, collaboration and contact center solutions, which are differentiated by our mobile-first user experience, open platform and global coverage.

Our market-leading product suite helped us close numerous significant deals in the quarter.

Let me give you some color on just a few of our wins.

Our global presence continues to grow.

I'll start with a 7-figure deal we won with Ladbrokes Coral, the largest provider of betting and gaming services in the U.K. Ladbrokes Coral was migrating off their legacy platforms and was looking for a best-in-class cloud-based solution.

What set RingCentral apart from the competition was our tight integrations with Google and Salesforce and ability to scale up to thousands of locations quickly and easily.

When fully deployed, Ladbrokes Coral will have 6,000 users.

Our integrated contact center continued to be a strategic differentiator for us.

It has helped us win significant deals during the quarter, including 6 of our million-dollar-plus TCV deals.

For example, in Q4, a leading health care technology service provider wanted to replace their legacy systems with cloud communication solutions.

They chose RingCentral because of our ability to deliver best-in-class integrated contact center and communication solution.

When fully deployed, this customer will have over 700 seats of RingCentral Contact Center and over 1,000 seats of RingCentral Office.

This deal is worth approximately $7 million in TCV.

As Vlad mentioned, our channel partners continue to be key contributors to our success.

A great example of our success in the channel was a win of the largest RE/MAX real estate franchisee in the country, RE/MAX Results.

This customer needed a flexible solution that allowed it to communicate from any location and in any mode to make its employees more productive.

The customer was also focused on providing superior user experience and flexible integration capabilities, key differentiators for RingCentral.

When fully deployed, RE/MAX Results will have 1,000 seats of RingCentral Office.

Helping bolster our success in the financial services this quarter, we achieved compliance with FINRA cybersecurity controls for cloud service providers.

This helped us win FirstBank, a Midwest financial services provider.

FirstBank was looking to replace their legacy provider with a cloud solution.

What differentiated RingCentral was the full scope of our offering: our collaborative communication capabilities with Glip, our integration capabilities with popular applications like ServiceNow and our best-in-class integrated contact center solution.

When fully deployed, FirstBank will have over 1,000 seats combined of Office and contact center over multiple locations.

Additionally, within the quarter, we had 2 more new customer wins in financial services that exceeded $1 million in TCV each.

In addition to our success with new customers, we continue to progress with our land-and-expand strategy.

Avery Dennison, a global leader in adhesive packaging technologies, started with less than 100 seats.

With the success achieved by the customer with the initial installation, Avery has expanded globally to more than 1,000 seats in multiple countries and has added contact center capabilities.

Another example of our land-and-expand is SoFi, an online personal finance company.

They wanted to find an innovative cloud solution with advanced integration capabilities, delivering high reliability and security.

SoFi initially signed up for 800 RingCentral Office users in Q1 of 2017 and has since nearly doubled its deployment of RingCentral to over 1,500 seats.

Our mid-market and enterprise growth and large deal success contributed to a great quarter, finishing up an excellent year.

We see robust addition of new logos as well as existing customers buying more.

With our unwavering commitment to innovation and customer success, we believe that we are well positioned to expand our lead in the industry.

Lastly, I'd like to invite you to join us at our RingCentral keynote presentation at Enterprise Connect in Orlando on March 14 to see some of our exciting product developments.

I'll now hand it over to our CFO, Mitesh Dhruv.

Thanks, Dave, and good afternoon, everyone.

On the call today, I will cover key financial results, growth drivers, the impact of ASC 606 and guidance for 2018.

Our Q4 and fiscal '17 results are under the historical 605 accounting standard.

Guidance for 2018 will be under ASC 606.

We are adopting 606 starting Jan 1, 2018 under the full retrospective method and have provided comparative numbers for 2016 and '17 in the earnings deck posted on our IR website.

In addition, unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons.

A reconciliation of GAAP to non-GAAP results was provided with our earnings press release and in the earnings deck.

With that, let me move on to our results.

We are very pleased with our ability to once again exceed expectations across all of our key financial metrics during the quarter.

We delivered total revenue and EPS above the high end of our guidance range.

In Q4, our subscription revenue grew 32% year-over-year to $130 million.

Normalizing for the impact of AT&T, our core subscription revenue growth rate was 36%, up from 28% in Q4 of last year.

More historical data on our core growth trends is contained in our earnings slide deck.

Total annualized exit recurring subscription or ARR grew to $546 million, up 32% year-over-year and 6% sequentially.

ARR for RingCentral Office grew to $466 million, up 36% year-over-year and 7% sequentially.

In the first quarter of 2018, we anticipate our total ARR to increase in the range of 6% to 7% sequentially.

This is in line with historical trends, although at a much higher level of revenue.

As Vlad mentioned, the key growth driver for RingCentral continues to be our expansion to mid-market and enterprise customers, supported by momentum in channel.

This expansion has multiple positive impacts to our business.

First, land-and-expand.

In Q4, we yet again saw strong performance in new bookings from our existing customers.

Upsells represented over 40% of the new business mix in the quarter.

Second, reduction in churn rate.

The gross churn for upmarket customers was less than half of the overall Office rate.

With the increasing mix of upmarket customers in our base, our annual gross churn rate for Office improved by 1 full percentage point to 10% in 2017.

The combination of strong upsell and lower gross churn resulted in higher overall net retention.

In fact, our annualized net retention for mid-market and enterprise business was about 130%, underscoring the significant opportunity we are capturing.

Last year, we used million-dollar TCV deals as an approximation of our progress in the enterprise segment.

In Q4, we had a record 15 7-figure TCV deals, up from 10 in Q3 and 5 a year ago.

Now as the enterprise segment is becoming a more meaningful component of our bookings and revenues, we would like to provide a more comprehensive measure of our progress.

To that end, as we mentioned last quarter, we will be providing a dollar-based enterprise metric defined as all customers with ARR more than $100,000.

Exiting Q4, these customers represented an $86 million business that grew more than 110% year-over-year.

We saw this momentum reflected in our Q4 results.

Total revenue for the fourth quarter grew 34% to $141 million.

The growth rate was driven by our mid-market and enterprise business.

Adjusting to the direct phone sales model resulted in a 3-point tailwind to our total revenue growth but had no impact on our subscription growth.

Operating margin was 3.9%, at the high end of our guidance range of 3.5% to 4%.

Moving on to our full year 2017 results.

Subscription revenue grew 30% to $463 million.

Total revenue grew 32% to $502 million.

Adjusting for the direct phone sales model resulted in a 3-point tailwind to our total revenue growth but had no impact on our subscription growth.

Non-GAAP operating margin expanded 130 basis points year-over-year.

The improvement demonstrates the inherent leverage in our operating model as the business continues to scale.

Cash flow from operations increased to $41 million, up from $30 million in 2016.

CapEx in 2017 was $27 million or approximately 5% of revenue.

In 2018, we expect CapEx as a percent of revenue to increase by 1 point as we expand our infrastructure to support growth initiatives.

Now for an update on AT&T.

As Vlad mentioned earlier, we are transitioning all Office@Hand by AT&T customers to a direct billing and account relationship with RingCentral.

This transition has no impact on our revenue accounting for these customers.

We are confident in delivering continuous and incremental value to these customers over time.

For planning purposes, we've made conservative assumptions that factor in normalized churn as well as potential incremental churn from migration.

Also, consistent with last year, we have assumed no new incremental business from these customers.

Before giving guidance for 2018, let's cover the impact from ASC 606.

The adoption of 606 drives 2 primary changes.

The first change is to our revenue treatment.

Under the 606 standard, certain discounts will be amortized over the life of the contract.

Overall, the impact of this change is immaterial to our revenue and year-over-year growth.

The more significant change relates to the treatment of sales commission costs.

Previously, we expensed all commissions as incurred.

Under the 606 standard, certain sales commissions will be capitalized and amortized over the expected customer life.

The impact of this change will result in approximately a 4-point decrease to sales and marketing expense as a percent of revenue.

As a reminder, this new standard is an accounting change only.

It has no impact on our operating or free cash flow.

Turning to our outlook.

As I mentioned earlier, our guidance is under the new 606 standard.

For 2018, we expect subscription revenue between $581 million and $589 million or an annual growth rate of 25% to 27%.

Excluding the impact of AT&T, we expect core subscription revenue to grow 31% to 33%.

The relative impact of AT&T on our overall growth will begin to abate in 2019 as our revenue base gets larger and AT&T compares normalize.

We expect total revenue between $629 million and $639 million or an annual growth rate of 25% to 27%.

We expect non-GAAP operating margin of 7.8% to 8.2%.

Our guidance includes about a 4-point tailwind from the adoption of 606 standard.

Removing that impact, we expect 75 to 100 basis points of underlying margin expansion, consistent with our earlier outlook.

We expect non-GAAP EPS of $0.56 to $0.60 based on 86.5 million fully diluted shares.

The difference between GAAP and non-GAAP EPS is expected to include $0.82 of stock-based compensation and $0.06 of amortization of acquired intangibles.

We do not forecast any effects of currency remeasurement, which could be a significant reconciling item between GAAP and non-GAAP EPS because it's difficult to predict and subject to constant change.

Now the outlook for the first quarter of 2018.

We expect subscription revenue between $134 million and $135 million or an annual growth of 29% to 30%.

Excluding the impact of AT&T, we expect our core subscription revenue to grow 33% to 35%.

We expect total revenue between $144.5 million and $146.5 million or an annual growth rate of 29% to 31%.

We expect non-GAAP operating margin of 7% to 7.6%.

We expect non-GAAP EPS of $0.11 to $0.13 based on 85 million fully diluted shares.

The difference between GAAP and non-GAAP EPS is expected to include $0.18 of stock-based compensation and $0.01 from amortization of acquired intangibles.

Again, we do not forecast any effects of currency remeasurement.

You can find our Q1 and fiscal 2018 guidance details in our press release and our earnings deck.

In summary, we continue to execute well, delivering strong results in 2017.

As a testament to our industry leadership, our core growth improved on a larger base.

We are excited for 2018 as we continue capturing market share from legacy providers while distancing ourselves from cloud competitors.

Last but not least, I'm happy to announce that we will be holding our second Investor Day on June 14 in New York.

More details will be available soon, and we look forward to seeing you there.

With that, let me turn the call to the operator for Q&A.

(Operator Instructions) Our first question comes from Bhavan Suri of William Blair.

Congrats, that was a phenomenal quarter between the reacceleration and the 15 deals over $1 million, just a fantastic job, so well done for me.

I guess, my first question, maybe to Mitesh and then -- and David maybe want to chime in, too, but if you think about the acceleration, both in bookings and then also in revenue, just unpack what the drivers are.

You touched on a bunch of things, partner, salespeople.

But if you were to sort of think about a trend of what's driving the acceleration, largely just to understand how you unpack that into some of the key drivers for the business.

Sure, Bhavan.

It's Mitesh.

I'll take that.

So thank you for the congratulations.

We were very pleased at seeing our core growth accelerate to 36%, up from 28% last year.

So that's good.

If you look at the drivers to unpack the acceleration, there were really 2 core drivers.

Number one is just secular trends.

The cloud's gaining momentum, and it's lifting all boats.

And the on-premise legacy vendors continue to be share donors.

So that's trend number one.

Second is more differentiation on our end, which is our execution.

And in that, I'd say, our investments in the mid-market and the enterprise segment, along with the channel, are really starting to pay off.

Our mid-market and channel -- our mid-market and enterprise business is now over $175 million business, as we said, which is growing over 75%.

Within that, 50% of our mid-market and enterprise is actually enterprise business.

So it's about $85 million business, which is growing more than 100%.

In channel, they continue to perform really well.

The bookings doubled again year-over-year for the seventh quarter in a row.

And what's happening as a result of this shift to larger customers, our net retention in the -- in that segment is now north of 130% annually.

So all these trends now are working together driving -- creating a flywheel effect for us, driving very strong bookings, which led to the acceleration.

Great.

Great.

And then a quick follow-up here.

Just on some of the trends that the legacy guys might do.

So obviously, you've sort of seen the Cisco-BroadSoft thing.

And I guess the question is, are you seeing them think about cloud themselves?

Or are you sort of -- and maybe Vlad can jump in on this one, but are you seeing sort of service providers try and host sort of a cloud offering for enterprise guys using Cisco or Avaya sort of like a third-party hosted model?

Do you run into that at all?

And sort of how -- what are you seeing out there sort of from that sort of enterprise guys trying to compete as you start to encroach on some of Cisco's larger customers and the Avaya base?

Yes, hi, Bhavan.

So if I understand the question, the question was about service providers trying to compete using a hosted model, correct?

Yes, yes.

Yes.

So look, they've been at it for a while, most of them have license from BroadSoft, which is exactly that model.

They're hosting somebody else's stack.

And the -- by and large, I would say that, that effort has not been particularly successful.

Again, numbers speaking for themselves, you can see our rate of growth now $0.5 billion recurring revenue number.

And there's, to our knowledge, at least, there is not a service provider anywhere out there with anything like that type of growth or even that type of base to speak to.

And the reason for that is that just calling something cloud does not make it cloud.

There is a very big difference between hosted software, which is what they're all doing, and true cloud, which is a true global, multi-tenant architecture.

And to make it -- to put it as succinctly as I can, the big difference is really in the rate of innovation, whereby a cloud provider, like ourselves, we have multiple releases per year and literally constant stream of updates, okay?

And if you look at all of the industry leaders from other industries, look at your Salesforce, look at Workday, NetSuite, even go outside, your Facebooks and Twitters, all of us are engaged in this continuous innovation and continuous improvement.

And if you look at software providers like BroadSoft now or Cisco, innovation cycle, on a good day, is maybe 2 years.

You simply cannot compete, and this is why cloud's winning.

Numbers are very clear.

Our next question comes from Terry Tillman of SunTrust Robinson Humphrey.

I'll echo Bhavan's congratulations and really like seeing that 130%-plus year-over-year net revenue retention rate.

That was exceptional.

My 2 questions, first question, actually, maybe Mitesh, for you.

Could you talk about what's involved economics-wise and the strategy behind acquiring the AT&T-related RingCentral business?

And what kind of impact will be in the financial model, whether it's revenue, expenses, cost of service, et cetera?

Sure, Terry.

I'll take that.

So just for background of people who may not have followed us for a long time, AT&T was a reseller of RingCentral for the last several years.

A couple of years ago, AT&T decided to take -- develop their own or sell -- resell BroadSoft solution.

And we've been -- we've stated that for a while.

And as a result, bookings of our product through AT&T last year have been virtually nonexistent.

Again, this was well-flagged.

So then the open question became, what happens to the installed base?

That was the biggest open question.

And to that end, AT&T and RingCentral mutually decided that the best thing in the interest of the customers to serve them well was to transition these customers to RingCentral.

That removed the major overhang from at least a Wall Street perspective of what's going to happen to the installed base.

I will tell you that early days, but migration has started, and we are seeing good indication of what the overall installed base is going to look like once they migrate, so early positive indications.

To your question on what's baked into the guidance and the financial model impact, we've actually taken more of a conservative posture there, Terry, as usual.

We've actually assumed churn rate similar to last year.

And then we've assumed some onetime incremental churn for migration as well as no new business from AT&T this year.

You can see all that is dialed into our guidance for 2018, which is about 25% to 27% total revenue.

And then you can see that the core revenue guide is over 30%.

And then my - yes, go ahead, sorry, sorry, go ahead.

I was just going to say, from a revenue accounting point of view, there's no change to rev rec, which is what you asked because AT&T's revenue was recognized on our P&L much like any other channel partner.

Okay.

That's good to know.

And my follow-up question just relates to contact center.

I think, Dave, maybe you had talked about the integral nature and the importance of that in some of those large TCV deals.

I know you all get a big lift on a per-seat basis when you sell contact center.

Can you quantify maybe -- and I don't know who this question is for, but could you quantify how much of the business now is contact center?

And going forward, how important that is in these larger million-dollar-plus TCVs?

Yes, this is Dave.

So of our -- I think we stated on our 15 large deals, million-dollar-plus TCV deals, 6 of those incorporated contact center.

And a couple of the largest incorporated contact center, including the $7 million TCV deal.

And it becomes an important opportunity for us.

It's our closest adjacency.

We know the ARPUs are 4x, typically UCaaS.

So a smaller number of contact center seats contribute disproportionately large to revenue.

We know our integration provides an enterprise-class contact center.

It's best-in-class Magic Quadrant-wise.

And it's still early days for us, but we continue to grow it even faster than the rest of the business.

And we see, in traditional players, contact centers made up anywhere from 20% to 60% of revenues for a UCaaS contact center company.

So I think that's our long-term opportunity.

Our next question comes from John DiFucci of Jefferies.

This is Julian Serafini on for John DiFucci.

I had 2 questions.

I guess the first one is relating to Avaya.

So we saw Avaya exit bankruptcy this year, right, and we saw them announce the acquisition of a cloud center -- cloud contact center vendor.

Have you seen any, I guess, change in your ability to win any business from legacy Avaya customers since they exited bankruptcy and I presume are in a more -- they're in a more financially sound position now?

Yes, this is Dave.

And I think the macro trends that contributed to them going into bankruptcy are still there in spades.

And that the secular trend to the cloud continues.

We see a greater willingness of customers to leave legacy providers and move to pure cloud solutions.

And we've also seen that in the channel partners.

We're seeing that with the customers and why we've been able to add so many channel partners, both ex-Avaya partners as well as other legacy providers.

So the overall trends that have been occurring, we see continuing to occur.

We don't see any significant difference as of yet in that competitive environment.

Okay.

I guess, second question, last two, I just want to touch on international quickly.

Can you give us, I guess, a bit more of an update, I guess, on your international efforts?

And would you be willing, I guess, to quantify like how much of your total business today is international?

And do you have like a sense of like when do you think international becomes like a meaningful contributor to your results going forward?

International, we got there initially because the customers were asking us and we expanded our Global Office offering and now we are covering 37 countries around the world.

And we also announced the opening of currency in-country purchasing of 13 European countries last year.

We saw that large deal, the Ladbrokes Coral deal, the 6,000 users, was a U.K. deal.

And we've -- as we've expanded our enterprise sales force, we have expanded that aggressively in the U.K. and they're starting to expand that into Western Europe.

So it's continuing to grow at a high rate, higher than the rest of the business.

So we'll continue to add incrementally to the overall story.

Next question comes from Meta Marshall of Morgan Stanley.

A couple of questions for me.

As you look to kind of the areas where you plan to invest in the next year, will those be focused more on kind of continuing to grow the international footprint?

Will it be working on different contact center functionalities or working on integration?

Just wanted to get a sense of kind of the direction of kind of the increase in OpEx over the year.

And second, Mitesh, I might have missed this.

Is there any change to kind of the margin or sales and marketing that we should consider with the change in AT&T moving that business over to your -- fully to you guys?

And then third, if I could, just on the larger deals or kind of the million-dollar deals, what -- how many of those 15 were brought in by the channel versus the direct sales force?

Sure.

I'll take the first and third and let Mitesh address the AT&T.

I think you're asking in 2018, where do we see our incremental investment.

And from a sales and marketing perspective, we continue to see very strong opportunity in mid-market and enterprise and continue expansion of those sales teams, both North America as well as international, and also continued opportunity in selling contact center as our closest adjacency.

So those will be some of the key areas.

On the million-dollar deals, we have the 15, 12 of the 15 were associated with the channel.

And so they -- and I think overall for the business, channel contributed more than 35% of our new bookings.

And Meta, on the AT&T, again, I said, as I mentioned earlier to Terry, no change to the revenue accounting.

On the P&L, revenue is the same.

And sales and marketing is, it's already dialed into our operating margin guidance.

Okay.

But was there any -- like how much of the -- like is there an uplift from having that business on your income statement versus commissions you're paying to AT&T?

Sure.

I mean, there was a rev share, which sort of goes away.

So there was -- I'm not going to go into exact details because of the nature of the contract.

But yes, there was an uplift in that.

And then we are reinvesting that in the direct business as well as nurturing the AT&T installed base.

Our next question comes from Nikolay Beliov of Bank of America Merrill Lynch.

And just wanted to add my congrats on great performance here.

My first question is around the channel.

I was hoping, Mitesh, if you can double-click on the channel, the size of the channel, excluding AT&T, telco versus other channel.

And then how the channel, so like the 2x increase here, impact the business model?

Sure, Nikolay.

So channel, again, as Dave said, has been a key growth vector for us.

80% of the million-dollar TCV deal came from the channel.

In terms of the size of the channel business, it's actually pretty -- it's getting pretty sizable.

It's about $100 million business that's doubling year-over-year.

And if you look at the impacts to the business model, there are several positive impacts to the business model because of the channel.

Number one is the marketing costs of our leads through the channels are lower because there's not much lead gen required.

The channels bring us the deal.

So that money can be redeployed to fuel the fire on our direct sales efforts because the channels prefer a residual model.

So that's impact number one, which is lower costs upfront.

Impact number two is lower gross churn and higher net retention.

Because the channel is on this pay-as-you-go model, the channel partners are incentivized to keep the -- hold on to the customers as long as they want, as long as they can, and the channels get -- those customers get served really well.

So it's a win-win-win for us, the channel and the customers, which then helps our gross churn.

In fact, if you look at the gross churn percentage, the gross churn from channels is about 40% to 50% lower than our overall direct gross churn.

So that's the gross churn impact.

And because the channels are mostly upmarket driven, they actually also help the net retention.

So net-net, I think there are several positive benefits for the channel, and they're here to stay.

And my second question is to you, Mitesh and David.

When you look at sales and marketing efficiency over the last year and going into 2018, clearly, what you just said, some of that applies to that?

How would you characterize sales and marketing efficiency and some of the metrics underlying that, sales attrition, sales productivity and kind of like the tweaks you made going into 2018 to keep up the momentum in mid-market and enterprise?

Yes, this is David.

On the sales and marketing efficiency, when we look at that relative to the new business we're bringing in, we've had positive trends in each segment.

And probably as early on as we invest in enterprise, we see significant improvement as that group starts maturing more over time with having more fully productive reps as it takes about -- approximately about a year to ramp up fully in that group.

So those have been positive trends for us.

The channel, obviously, also contributes by providing lower initial cost, upfront cost on the sales and marketing basis.

Our next question comes from George Sutton of Craig-Hallum.

A question for David.

With the growth in your major city strategy, along with the channel and inside sales, I'm just curious, how much of the opportunity set do you feel like you're seeing today relative to what you might have seen a year ago?

And I'm curious as an aside to that for Mitesh, what -- at what point do we start to get leverage from the sales and marketing costs?

Yes.

So this is David.

So more on the fact that we just built our enterprise team over the last 1.5 years has gotten us into a lot more deals.

Additionally, the channel is helping us do that also.

Are we seeing every deal?

We're not seeing every deal.

There's still opportunity for increased coverage.

We know several of the legacy providers in this category have had very large enterprise sales teams, and that's still a big opportunity for us as the customers are becoming more willing and the secular nature of the cloud movement is increasing.

So I think we're still early days in capturing a big opportunity.

And on the sales and marketing efficiency, George, it is what Dave said actually that we are in the early years of capturing this opportunity.

If you look at the underlying sales and marketing leverage, we are seeing a lot of leverage across all segments.

Our productivity across each segment is getting better, but what we are not seeing in the P&L is that those dollars are getting reinvested to build out Dave's sales force, which is the large opportunity ahead of us.

So I think underlying -- under the hood, there's a lot of leverage in the business model.

And overall as the business model matures and the sales force ramps across each segment, you should start to see some leverage over time as we step up to $1 billion.

But ultimately, we may choose to invest those dollars as we are doing this year.

Okay.

Just one other thing, if I could, why would AT&T agree to this change?

Or are they -- is there a payment that goes to AT&T to transfer these customers over?

Just curious about the motivations.

Yes, the primary -- this is David.

The primary motivation was to do what was best for the customers.

And I think that drove all the discussion.

And ultimately, when we looked at the options together, we felt like this was the best option to move those customers to RingCentral Office.

So that was the primary driver of the deal.

And then, Mitesh, do you want to talk about the economics?

Economics, look, we have not disclosed the economics.

It'll be available in our public filings.

But just to frame the discussion, we paid AT&T a fair price in the low tens of millions of dollars.

Our next question comes from Brian Peterson of Raymond James.

So Mitesh, you mentioned the 130% net retention number in the enterprise.

Is there any way you can deconstruct that a bit?

Maybe what are the drivers?

This is a really big number.

Sure, Brian.

So the net retention for the mid-market and enterprise customers was 130% for the year.

And they are -- basically, it's driven by our move to larger customers.

And it drives 2 different vectors.

One is the gross churn for these larger customers is much lower than the downmarket customer.

The gross churn for our upmarket customers is less than half of the downmarket customers.

And it's about in the low to mid-single digits annually.

So that's number one.

And number two is, these larger customers drive land-and-expand.

About 40% of our new business came from existing business, which is land-and-expand this quarter.

And within land-and-expand, we now have, with our product portfolio and global expansion, we can drive land-and-expand in 3 flavors.

One is going after other divisions with natural augmentation of employee seat count.

Number two is our global footprint.

Dave mentioned we are in 37 countries now.

So that's an expansion factor.

And the third is, with the whole product portfolio we have with contact center and Zoom rooms to replace the TelePresence, we replace -- we also get a bite of the apple in terms of product.

So all these 3 vectors of upsell and cross-sell, along with lower gross churn, led to this net retention number of 130%.

Our next question comes from Sterling Auty of JPMorgan.

On the AT&T base that's coming over, I missed it if you said it, can you quantify in some form or fashion how big that base of customers actually is?

Sure, Sterling.

It's going to be available.

It's about north of $50 million of installed base.

Okay.

And is there a sense -- I imagine they've not been given a heavy upsell in the last 2 years.

Is that correct?

And any early evidence on those that are coming over, maybe a willingness to buy more?

Sure.

I'll take the first part and maybe I'll have Dave chime in.

So yes, you're absolutely right.

They were on AT&T's ticket so that we've not seen any meaningful upsell.

In fact, they have been churning at, call it, the high teens annually.

And that's what we have dialed in to the guidance, Sterling, in fact, a little bit more conservative than that even.

In terms of upsell opportunities, sure, there are upsell opportunities because now these customers get to have a shot at our full product portfolio with contact center, Glip, global expansion.

Early days, though, we've just started the migration.

So early indications are positive, but too early to take it to the bank.

Okay.

One follow-up, just wondering, as you look at the 2 customer segments, how would you characterize the trends in customer acquisition costs?

I know we talk a lot about the mid and enterprise piece, but kind of curious what's happening in terms of the trends of customer acquisition costs in the core SMB part of the business.

Yes, this is David.

The -- I think we talked about the sales and marketing efficiencies in all segments has continued to improve overall.

So we see flat to improving in all of those segments.

In the upper segment as we've matured the sales force, it's probably a quicker improvement than we see in the small business, but there's been positive trends throughout.

Our next question comes from Heather Bellini of Goldman Sachs.

This is Jon on the line for Heather.

Just going back to the answer on the -- to the [increasing sales within] existing accounts.

How much of this is seat growth itself?

And how much of it could be attributed to expanding SKUs within those customers?

And as a follow-up and clarification point, are these 15 deals, 15 $1 million deals, were some of them prior customers that have now sort of crossed that $1 million threshold or are these new accounts?

So this is Dave.

I'll take the second part.

And the second part was of the 15 million-dollar TCV deals, how much was upsell into existing customers versus maybe net new logos.

So we had -- of the 15, 13 were net new logos.

And I'll combine that with the fact that 40% of our new bookings were upsell.

These types of deals are really seeding future growth for us in the business.

So we're pretty happy with the acquisition activity that we're achieving in the market.

And in terms of the second question, the upsell mix between seats and product, right now, it's more heavily -- heavier weighted towards the seat, and the product remains an opportunity for us.

Our next question comes from Mike Latimore of Northland Capital Markets.

In terms of these 13 net new deals, these enterprise deals, what percent of the total opportunity are they initially booking, obviously, then lead to future upsell potential there?

Sure, Mike, it's -- I'll give you a ballpark.

It's about, I would say, between 15% to 20% of the overall opportunity is the way to frame the initial purchase.

Okay.

Great.

And then with regard to the AT&T base, what does the end consumer see?

Is it basically just your name on a bill or versus AT&T?

Or what are they going to see?

So traditionally, it's been RingCentral Office@Hand by AT&T.

And now it's -- as it transitions, it will become RingCentral Office.

So...

So that's the only real change they're going to experience?

That's the brand change and then the billing will switch from AT&T when it's RingCentral Office@Hand, which is currently AT&T billed to RingCentral billed when it's RingCentral Office.

Our next question comes from Samad Samana of Stephens Inc.

First, the company in the past has talked about ramping channel partners themselves that you're attracting over from the Avaya channel base and some other competitors.

I'm curious if you could give us an idea of how fully ramp-up you feel like your partner base is and how much room there is to drive increased productivity and add to that partner channel?

And then Mitesh, I have a follow-up for you.

Yes, this is Dave.

On the channel group and ramping up our partners, this was the seventh consecutive quarter of greater than 100% year-over-year new bookings growth.

And channel contributed to a large number of those large deals as well as our largest -- as well as the $7 million TCV deal.

So definitely a key contributor.

We do see further opportunity as these partners ramp up.

We continue to sign new partners.

And we've moved maybe more from the master agents to more of national partners that control their own sales forces and have traditionally sold more legacy services.

So those have been kind of the newer part of who we're signing up.

And those will ramp in over the next 12 to 18 months.

So there's still a long -- a fairly lengthy ramp-up period that we see coming.

Great.

And then, Mitesh, the stock-based compensation guidance for the company, it's a big year-over-year increase.

I think you guided for around $70 million, just $42 million in 2017.

That's quite a big leap.

I'm wondering if you could -- did I miss something or can you just help me understand why the big jump year-over-year?

Sure, Samad.

So yes, it did jump from last year for a very simple reason that we in the Bay Area compete with the likes of Facebooks and Googles of the world for talent.

And we benchmarked our stock-based compensation extensively across all SaaS peers, and now we moved our compensation more in line with the SaaS peers at about 11%.

Got you.

That's helpful.

I just wanted to make sure I didn't miss anything that was driving that beyond an expensive Bay Area outcome.

You never miss anything, Samad.

So yes, it was the expensive Bay Area where we live in, yes, yes.

Our next question comes from Jonathan Kees of Summit Research.

Wanted to ask specifically about your carrier channel.

It's great that you provide some quantification about AT&T.

In the past, you've talked about BT and TELUS and talked about it qualitatively.

I'm just curious in terms of how they fared in the quarter.

And if you could talk about it in more quantitative way, that'd be great.

This is Dave.

Yes, both those partners, we've had positive tractions with.

We continue to talk about new opportunities with both partners and expand our penetration into their sales teams and into additional segments within those organizations.

So they've both trended in a positive manner and continue to be an important part of our carrier channel business.

All right.

Then let me ask you this way, if I can.

With the conclusion of the fiscal year, any 10% customers?

I mean, if AT&T was -- if you didn't purchase over their properties, would they have been a 10% customer?

Jonathan, it's Mitesh.

No, they wouldn't have crossed 10%, far from.

So you had no 10% customers?

No, except -- excluding AT&T.

Excluding AT&T?

Yes.

Our next question comes from Zack Turcotte of Dougherty & Company.

Zack Turcotte on for Catharine Trebnick here.

Just a couple of questions on your product line beyond Office.

So wondering what you're seeing as far as demand for Glip and if you're seeing more success packaging that with Office for new customers or upselling to current customers.

And then secondly, kind of just thoughts on the intersection of UCaaS and CPaaS and if there's any potential to move into that market as we've seen from some competitors?

Yes, this is Dave here.

So I think the question was the product suite.

So we see Glip as a key component of the overall product.

We're integrating it more thoroughly into Office.

And it comes with every Office seat that we sell.

So it's intrinsically integrated into the product today.

And it helps with engagement and customer retention.

And obviously, we've had opportunities selling, monetizing other components such as Contact Center, Global Office and our Live Reports as well as Meetings and Rooms.

Our final question comes from Will Power of Robert W. Baird.

Yes, a lot of focus on enterprise, not surprisingly.

I guess, just as we think about the SMB outlook from here, how should we think about the growth opportunity there?

And then what does that competitive landscape look?

Has that changed at all, more competitive, less competitive, status quo, just kind of looking for some frame reference for that piece of the business.

And then, Mitesh, on the capital intensity, I think you said it would be up a little bit in 2018 to accommodate the enterprise growth you're seeing.

Is that kind of the new normal or should I think kind of onetime-ish of that?

Let me take the CapEx first, and I'll let Dave address the SMB part.

On CapEx, it's not the new normal as such, but at least it's normal for 2018.

We are expanding our sales footprint.

So the drivers for CapEx are mostly our sales expansion and also some -- our global footprint expansion that drives CapEx for '18.

So for '19, maybe it's 5.5, 6 points.

So it's sort of in the margin there.

And then on small business, we continue to look at offerings for the small business.

It's been part of our business.

We have the freemium offerings, both with our Glip product that we continue to push as opportunities for small business expansion.

And that business doesn't grow -- given the unsaturated nature of the enterprise segment, that's growing significantly faster, where the small business is probably closer to around 20% growth.

Ladies and gentlemen, we've reached the end of our question-and-answer session.

This concludes RingCentral's fourth quarter earnings conference call.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.